Stock Market Italy

Stock Market Italy, Uncertainty over who will lead Italy through the debt crisis once Premier Silvio Berlusconi resigns sent Italian borrowing rates through the roof Wednesday and slammed stock markets and the euro.

Though speculation that the European Central Bank has been buying Italian government bonds has helped ease the market pressure somewhat, Italy and the eurozone were in a dangerous new phase of the raging debt crisis. Italy is considered too big to save, meaning its financial collapse could spell ruin for the euro as well as the global economy.

Tuesday’s news that Berlusconi had finally bowed to pressure and would resign once new austerity measures are passed had helped support markets through the Asian session. Berlusconi had been perceived as part of the problem in the political deadlock gripping Italy.

That buying persisted for a while in Europe, but sentiment quickly soured again as traders worried about Italy’s uncertain future.

Italy’s ten-year yield jumped to a high of 7.46 percent, way above the 7 percent rate widely considered to be unsustainable in the long-run. Greece, Ireland and Portugal were forced to take bailouts when their ten-year borrowing rates rose and remained above 7 percent.

By mid-afternoon, the yield was back down at 7.19 percent, still a hefty 0.61 of a percentage point rise from the previous day.

“Although we do not know, because the ECB does not break out its bond purchases, it is safe to assume that the ECB is buying Italian bonds,” said Louise Cooper, marketsanlyst at BGC Partners. “But obviously not enough to prevent the rise in yields and not enough to scare off the seller.”

What’s frightening investors is that there is no easy solution to Italy’s problems, with or without Berlusconi at the helm. With debts of around euro1.9 trillion ($2.6 trillion), Italy’s debts are considered far too big for Europe to bail out.

Higher rates would make it more difficult and expensive for Italy to roll over its debts. The country has over euro300 billion ($412 billion) to raise in 2012 alone. On Thursday, it’s due to auction some euro5 billion worth of one-year bills.

A protracted period of political deadlock will only make matters worse.

“The positive impact of Berlusconi’s promised resignation is being diluted by a lack of clarity on where we go from there,” said Adam Cole, ananlyst at RBC Capital Markets. “The possibilities range from a technocrat government â€” most market positive â€” to new elections â€” most negative.”

In Europe, the main Milan stock index was down 3.6 percent while Germany’s DAX was down 2.6 percent at 5,806. The CAC-40 in France fell 2.7 percent to 3,060 while the FTSE 100 index of leading British shares was 2.2 percent lower at 5,445.

The euro also fell sharply, trading 1.8 percent lower at $1.3566.

In the U.S., the Dow Jones industrial average fell 2.2 percent to 11,906 while the broader Standard & Poor’s 500 index fell 2.4 percent to 1,245.

As well as keeping one eye on developments in Rome, investors are waiting to hear who will be the new prime minister in Greece.

On Tuesday, Socialist Cabinet members issued their resignations, paving the way for the creation of a new government, which is only expected to last until February.

The new government will be tasked to secure the country’s new euro130 billion ($179 billion) European rescue package and then get it through parliament. That approval will allow the release of a euro8 billion ($11 billion) loan installment, without which Greece will go bankrupt before Christmas, potentially wrecking Europe’s banking system and sending the global economy back into recession.

There was also some cheer from the news that China’s stubbornly high inflation fell in October as rapid rises in food costs eased. The decline was seen positively by investors as it gives Beijing more room to stimulate China’s economy.